Retirement Accounts and Consent for Government

The topic of retirement accounts and the possibility of government confiscations has grown in popularity.  It is easy to understand why.  When people see what happened to the bank customers in Cyprus and they see their own government getting ever-more hungry for more tax money, it is easy to get paranoid about these things.  (Is it paranoia if it is true?)

I have written about this topic before and will probably continue to write about it in the future.  I think the U.S. government will certainly try some form of confiscation of retirement accounts.  This could include 401k plans, IRAs, pensions, and of course, the government's own retirement plan of Social Security.  Actually, when it comes to government pensions and Social Security, this is a completely different subject.  There isn't actually any money there and the only way they can be funded is through taxes, borrowing, money creation, or selling government assets.

For this post, I am mainly referring to 401k plans, IRAs, and possibly private pension plans.  In a sense, there is already confiscation, even if somewhat indirect.  If you withdraw from your retirement account before the government-approved age, then you will pay a 10% penalty on top of the income taxes that you owe.

Another interesting thing is that you can't generally withdraw from your 401k workplace plan if you are still currently employed with the employer that sponsors your plan.  I have complained about this fact to others before.  I say, "this is my money and I should be able to do what I want with it."  I point out that someone could be rich with their 401k plan, yet they might not have two dimes to rub together.  They could be struggling to pay their bills and meet their basic daily needs and yet have hundreds of thousands of dollars in a 401k plan.  And it isn't always that easy to get a hardship withdrawal as the criteria can be very specific.

The reaction I get from people varies.  Some agree that people should be able to access their retirement accounts.  But you would be surprised how many will justify the current scenario.  They will say things such as, "well, it is supposed to be for your retirement."  Thank you for being my babysitter in my life.  Are there any other decisions that you think should be made for me?  Should I get government approval for who I marry or where I go to dinner?

This is why such rules exist.  People do not have to expressly consent.  They just have to consent enough that they are not against it.  If someone doesn't know or understand about a particular issue (and this could be on anything) or if they just don't care, then the politicians will come down on the side of bigger government and more power for themselves almost every time, assuming that a majority of people are giving this tacit consent.

As far as retirement account confiscation, I think it will continue to be more subtle.  The government will not throw the frog into boiling water, unless it is just a test run.  They will warm the water up slowly on us frogs.  They may impose a bigger penalty for early withdrawal.  They may limit how much you can have in a retirement account.  They may start off with "government-guaranteed" mutual funds (or something like that).  They will be voluntary at first.

If there are further steps in retirement confiscation, they will likely be in baby steps.  You will probably have warning signs.  I doubt it will happen all at once.  I don't think the government is likely to announce that it is simply confiscating 10% of everyone's retirement account.  There would be too much backlash.  The politicians are really stupid if they do something like this, as they could face something of a revolution.

This will be an interesting issue to continue to follow.  You should be cautious if you contribute to, or have, a retirement account.  I used to be one of those people who thought it was stupid not to contribute.  I pointed out that it was free money from your employer if you could get a company match.  My opinions are far more mixed now, if not opposite.

As with everything else in your investment life, you should diversify.  I think it is ok to have a retirement account, but you should realize the risks are there for the government to get its hands on your money.  You should never contribute more than what it takes to get a company match.  But I think there are times when it doesn't even make sense to get a company match.  You are locking up your money, particularly since you are working for the company and can't withdraw anything.  If you find that you have more money in your retirement account than anywhere else, then it probably makes sense for you not to contribute any further.  You would be putting too many eggs in one basket.

As I said, there will probably be warning signs of a government confiscation.  It will come in baby steps.  You should be in a position to protect your money, even if it means withdrawing it early and taking a 10% hit.